Everyone Is WRONG About The Debasement Trade

Key Concepts

• Debasement Trade: A strategy to profit from the perceived devaluation of a currency, typically the US dollar, through increased money supply.
• M2 Money Supply: A measure of the money supply that includes M1 (currency in circulation and demand deposits) plus savings deposits, money market securities, and small-denomination time deposits.
• Debt-to-GDP Ratio: The ratio of a country's national debt to its gross domestic product, indicating its ability to repay its debts.
• Quantitative Easing (QE): A monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy.
• Yield Curve Control: A monetary policy where a central bank targets a specific yield for a government bond of a certain maturity.
• Log Chart: A chart that displays data on a logarithmic scale, useful for visualizing exponential growth or identifying rates of change.
• Rate of Change: The speed at which a variable changes over time, crucial for understanding trends in money supply growth.
• Treasury Yield Curve: A graph that plots the yields of US Treasury securities with different maturities, typically ranging from short-term (e.g., 3-month) to long-term (e.g., 30-year).
• Inverted Yield Curve: A situation where short-term Treasury yields are higher than long-term Treasury yields, often seen as a predictor of recession.
• Bear Steepener: A market condition where long-term yields rise faster than short-term yields, often driven by increasing inflation expectations.
• Bull Steepener: A market condition where short-term yields fall faster than long-term yields, often associated with economic slowdowns or easing monetary policy.
• Counterparty Risk: The risk that the other party in a financial transaction will default on their contractual obligations.

The Debasement Trade: A Pro's Perspective

The current market sentiment, with gold and Bitcoin nearing all-time highs, has fueled widespread discussion about the "debasement trade." However, the common approach of simply buying gold and Bitcoin is deemed incomplete and potentially incorrect by the speaker. This summary outlines a more nuanced strategy employed by professionals to navigate this trade, focusing on understanding the underlying mechanics and employing specific financial instruments.

1. The Debasement Narrative: Money Printing and Exploding Debt

The prevailing narrative driving the debasement trade centers on the exponential growth of the US M2 money supply, illustrated by a chart showing an increase from $0 trillion to $24 trillion since 1960. This parabolic growth, particularly from 2000 to 2021, suggests an increasing amount of currency chasing goods and services, leading to massive inflation and a depreciation of the US dollar.

Key Points:

• M2 Money Supply Growth: The chart from 1960 to the present shows a dramatic, near-exponential increase in M2, indicating significant money printing.
• Exploding Debt and Deficits: This money printing is occurring alongside escalating US government debt and deficits, which are projected to continue rising.
• Foreign Dumping of Treasuries: Foreign entities are reportedly selling US Treasuries due to perceived fiscal irresponsibility and the unsustainable nature of US debt.
• Fed Intervention (QE/Yield Curve Control): To manage rising interest rates caused by increased Treasury supply and decreased foreign demand, the Federal Reserve is compelled to engage in Quantitative Easing (QE), effectively "money printer go burr."
• Government Benefit vs. Individual Loss: While high inflation benefits the government by reducing the real value of its debt (lowering the debt-to-GDP ratio), it erodes the purchasing power of individual savings.
• Conclusion of the Narrative: The narrative concludes that to protect purchasing power, one must invest in hard assets like oil, Bitcoin, and gold, as the market will eventually recognize the currency debasement.

2. The Plot Twist: Debasement and the Rate of Change

This section challenges the simplistic interpretation of money supply growth by introducing the concept of the "rate of change" and the importance of using logarithmic charts.

Key Points:

• Definition of Currency Debasement: In a fiat system, debasement occurs through monetary policy decisions, primarily by creating more money out of thin air. Governments use this as a fiscal tool to fund operations and reduce debt burdens by paying back with cheaper dollars.
• The Misleading Nature of Absolute Charts: A standard chart of M2 money supply can be misleading because it shows absolute growth, not the rate at which that growth is occurring.
• The Importance of Rate of Change: The speaker emphasizes that the rate of change is what truly matters, using the analogy of a stock's price appreciation. A stock at $100 growing at 20% per month is more attractive than a stock at $1,000 growing at 1% per year.
• Logarithmic Chart Analysis: When M2 money supply is viewed on a log chart, the rate of change tells a different story.
  • 1960s-Early 1980s: Showed staggering increases in the rate of money supply growth.
  • Post-1990s: The trend leveled off, and subsequent uptrends had a lower rate of change compared to the earlier period.
  • 2020-2022: A significant jump in the rate of change occurred, but it has since leveled off.
  • 2023 Onwards: The rate of change, even with an upward trend, appears lower than in previous periods like 2000-2019.
• Aggregate Growth Comparison:
  • 2020-2025: Over 40% increase in money supply.
  • 1980-1985 (Disinflationary period): Over 60% increase in money supply. This highlights that high money supply growth doesn't automatically equate to hyperinflation if the rate of change is not unprecedented or if other factors are at play.
  • Other 5-Year Periods: 2000-2005 and 2010-2015 also saw around 40% growth.
  • Gold Standard Era (1960-1965): Nearly 50% growth under a gold standard.
  • Strictest Gold Standard (1880-1885): Roughly 70% growth.
• Conclusion on Money Supply Growth: The money supply growth from 2020-2025 is not unprecedented; in fact, it's below average when compared to historical periods, including those under strict gold standards.
• Explaining Gold and Bitcoin Rallies: The speaker attributes the rise in gold and Bitcoin not to debasement fears, but to:
  • Central Banks Dumping Gold: Due to counterparty risk concerns, especially after the freezing of Russian dollar assets.
  • Global Uncertainty: Gold and Bitcoin are seen as safe havens with no counterparty risk during times of increasing global uncertainty.
• Market Psychology: The key to investing is not what the data says, but what the market thinks. If the market believes the dollar is being debased, asset prices will reflect that belief.
• Pro Strategy: Professionals understand that in a debt-based monetary system, a decreasing rate of money supply growth can lead to disinflation or deflation, not necessarily inflation.

3. The Pro Strategy: The Treasury Yield Curve Spread

This section introduces a sophisticated strategy used by professionals that offers an asymmetric risk/reward profile, often preferred over simply holding gold or Bitcoin. This strategy involves trading the spread between the 2-year and 10-year Treasury yields.

Key Points:

• The 2-Year vs. 10-Year Treasury Yield Spread: This chart tracks the difference between the yield on a 2-year Treasury note and a 10-year Treasury bond.
• Inverted Yield Curve: An inversion occurs when the 2-year yield is higher than the 10-year yield, a counterintuitive situation that has historically preceded recessions.
• Historical Precedent: The speaker highlights that significant increases in this spread have consistently occurred before recessions in the 1990s, the dot-com bust, the Global Financial Crisis (GFC), and the pre-COVID inversion in 2019.
• Dynamics of the Spread:
  • Fed Dropping Rates: Initially, the spread can increase as the Fed cuts rates, bringing down the 2-year yield faster than the 10-year. This is often associated with economic slowdowns and disinflationary/deflationary pressures.
  • Increasing Inflation Expectations: The spread can also increase when the 10-year Treasury yield rises due to expectations of higher growth and inflation. This signifies a shift from disinflation/deflation towards accelerating consumer prices.
• Bear Steepener vs. Bull Steepener:
  • Bear Steepener (Green Line): The spread increases due to rising inflation expectations, leading to higher long-term yields.
  • Bull Steepener (Black Line): The spread increases as short-term yields fall faster than long-term yields, often due to Fed rate cuts in response to economic weakness.
• The "Heads I Win, Tails You Lose" Proposition: The core advantage of this trade is that the spread tends to widen significantly regardless of the economic outcome:
  • Scenario 1 (Decreasing Money Supply Growth): Leads to disinflation/deflation, potentially causing asset price declines. The spread widens as the Fed cuts rates.
  • Scenario 2 (Increasing Money Supply Growth/Debasement): Leads to inflation. The spread widens as inflation expectations rise.
  • Scenario 3 (Recession - Disinflationary/Deflationary): Similar to Scenario 1, the spread widens.
• Current Situation: The yield curve was massively inverted and has since narrowed to around 50-55 basis points. The speaker notes that the spread typically goes much higher.
• Personal Disclosure: The speaker owns gold and Bitcoin and has previously traded this spread but does not currently have the position on, though it could be re-established.
• Asymmetric Advantage: This strategy offers an asymmetric payoff because the spread widening is the expected outcome, regardless of whether the underlying cause is inflationary or disinflationary.

Conclusion and Call to Action

The video argues that the common understanding of the debasement trade is flawed. While money printing is occurring, the rate of growth is not unprecedented. The speaker advocates for a more sophisticated approach, highlighting the Treasury yield curve spread as a professional strategy that offers a favorable risk/reward profile by capitalizing on the widening of the spread, irrespective of whether the economy experiences inflation or deflation.

The speaker concludes by promoting a free webinar on October 29th, which will cover three contrarian strategies used by professionals to outperform the S&P 500, offering a bonus coupon for Rebel Capitalist Live tickets to attendees.